Mises Wire

Do We Have a Free-Market Medical System?

Edward K. Glassman, my long ago Harvard classmate, author of Dow 36,000 (predicting Dow at that level by 2005), and current director of the George W. Bush Institute, extolls our free market medical system at FoxNews this week. The first reader to comment on the article agrees that we have a “ free market” system, but thinks that “ profit based healthcare” should be “outlawed.” Another reader thinks that we actually have “socialized medicine.”

So what do we have? I think the most apt description would be “crony capitalist” medicine, one in which powerful special interests conspire with government officials to create legally mandated monopolies, with the specific goal of thwarting free market competition.

Here is how it actually works:

Most people wonder why there are no visible prices in medicine. You only find out what the charge has been after the service has been delivered. There actually are prices — controlled prices — but you aren’t supposed to know what they are. Each year a committee of the American Medical Association recommends a set of prices to Medicare. The committee is dominated by medical specialists, so specialists tend to do particularly well. Medicare is actually run, not by government, but by private insurance companies, and these companies adopt these prices for private insurance purposes as well. Congress further sweetened this price controlled system for hospitals by requiring Medicare to pay more for the same service if provided by hospital employees. This has inevitably led to local hospitals buying out most of the surrounding private medical practices, which has in turn created local medical service monopolies that feed patients to the hospital for its more costly services.

These monopolies are further sweetened for doctors by legally barring nurses, chiropractors, four-year trained naturopathic doctors, and other health professionals from using the full extent of their medical training. In this way, the supply of medical services is constrained, which further raises prices.

Notwithstanding all the preceding, it is not the American Medical Association, which is itself financed by a monopoly in medical coding granted by the US government department of Health and Human Services, nor the hospitals, nor the medical doctors as a group that actually run the medical system. The top spot is reserved for the drug companies, which in turn share their largesse with the AMA, doctors, medical journals, media companies, and especially with politicians. In return, drug companies are granted a series of powerful monopolies, monopolies that drive up the cost of medicine and, given the employer role in healthcare, destroy jobs, raises, and economic opportunity as well.

First, drug companies claim a legal monopoly when they patent a drug. The drug research may have been done by the government or by a university using government money but it doesn’t matter. The grant of monopoly stands.

Then the drug company takes the patented medication through the FDA approval process (at an average cost of $3 billion over what can easily be a decade). Drug companies do not object to this ordeal, because the stiff price both eliminates any competition from un-patentable treatments and also flows into the salaries of FDA employees, who consequently tend to take a friendly view of drug companies and zealously guard the legal exclusivity of their products.

FDA enforcement includes armed raids and threats of a lifetime in jail for any producer who makes medical claims without permission. Even cherry and walnut growers have been threatened. The agency takes the position that cherry and walnut producers, to make health claims for any of their products, they must first turn them into drugs through the drug approval process, thus driving up prices for all patients.

No, this is not a free market system nor anything remotely close to one. In a genuine free market system, prices reflect the decisions of consumers. Producers who solve significant problems are rewarded with high prices and profits. High prices and profits in turn attract lots of competition. The competition not only prevents monopoly. It also improves quality and very importantly increases supply, which is the only sustainable way to reduce prices. Consumers then get better medicine and ever lower prices. Producers dislike competition, and therefore try to buy government help in manipulating or fixing prices. This is more easily accomplished in medicine, because it can all be done under the guise of government “protecting” consumers when actually the consumers are being fleeced and impoverished.

There are many honest and dedicated medical professionals sincerely devoted to the healing arts. But they are trapped in a system that can more accurately be described as a crony capitalist nightmare.

Hunter Lewis is author of eleven books, including Economics in Three Lessons & One Hundred Economic Laws, Where Keynes Went Wrong, and Crony Capitalism in America 2008-2012, and has contributed to the New York Times, the Washington Post, the Times of London, The Atlantic and many other magazines and web sites including Mises.org and LewRockwell.com. Lewis is also co-founder of Against Crony Capitalism.org as well as co-founder and former CEO of Cambridge Associates, a global investment firm. He has served on boards and committees of fifteen not-for-profit organizations, including environmental, teaching, research, and cultural organizations, as well as the World Bank.

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